Retail sales plummeted in Hungary by 12.3% in May, whilst industry output declined more than forecast, indicating an economic slump that may result in a wider budget deficit.

The government continues to tackle a stagnating economy amid a rapid consumption slowdown, as inflation in the country – the highest in Europe at above 20% in annual terms during May – erodes purchasing power.

The government has forecast a deficit of 3.9% of economic output in 2023, with plans to reduce it to 2.9% in 2024, Reuters news agency reports. However, analysts have cautioned these targets appear ever more unrealistic without spending cuts.

During the initial five months of the year, Hungary’s budget shortfall increased to 2.763 trillion Forints ($7.83 billion), up to 80% of the annual target, as pension increases and energy subsidies bolstered spending.

“We expect the public shortfall at 4.4% of GDP in 2023, despite 1.1% of GDP in extra profit taxes on banks and retail, and cuts in line ministry spending of 0.8% of GDP,” according to Unicredit analysts this week.

Yet OTP analysts forecast a higher 6% deficit unless further steps are taken by the government.

Hungary’s Forint fell to a three-month low of 384 against the Euro on Thursday, prolonging losses from Wednesday, as investors priced in risks ahead of an S&P ratings review due to be published on Friday.

Data out on Thursday revealed Hungary’s calendar-adjusted retail sales declined by an annual 12.3% in May, following a revised 12.7% drop in the previous month. Whereas industrial output edged down in May by an annual 6.9%, surpassing analysts’ predictions for a 5.2% fall, the Reuters report adds.

Despite showing improvement so far this year in terms of the country’s current account balance, EU funds still haven’t been received which were suspended under the government's rule of law dispute with the European Commission, piling further pressure on the budget.

The government forecasts Hungary’s economy will grow by 4% in 2024, following just 1% growth this year.

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